439 F.

2d 1294

CONTINENTAL INSURANCE COMPANY OF NEW YORK,

Plaintiff-Appellee,
v.
Robert SHERMAN,* Third-Party Plaintiff-Appellee,
v.
COATES & DORSEY, INC., Third-Party DefendantAppellant.
No. 29600.

United States Court of Appeals, Fifth Circuit.

March 10, 1971.
Rehearing Denied and Rehearing En Banc Denied April 29, 1971.

Jeanne Heyward, Talburt, Kubicki & Vogler, Aubrey L. Talburt, Miami,

Fla., for appellant.
Smathers & Thompson, Miami, Fla., William C. Lewis, Jr., for
Continental Ins. Co.
Stanley Haves, William C. Lewis, Jr., Miami, Fla., for Robert Sherman.
Before RIVES, AINSWORTH and MORGAN, Circuit Judges.
MORGAN, Circuit Judge:

This is an appeal from a judgment based on a jury verdict for the plaintiff in a
third-party action brought by Robert Sherman against Coates & Dorsey, Inc.,
the agent of the Continental Insurance Company of New York, to recover for
damages sustained to the schooner Penida on the ground that Coates & Dorsey
negligently caused the issuance of a policy of marine insurance on the vessel
containing a private pleasure warranty which failed to cover the incurred loss
and failed to notify Continental that the vessel would be used for commercial
purposes and from the dismissal of a cross-claim brought against Continental
by Coates & Dorsey for indemnification. We reverse and remand.

Robert Sherman, the appellee here, rented his schooner, the Penida to Richard

Robert Sherman, the appellee here, rented his schooner, the Penida to Richard
Harris for a voyage to the Galapagos Islands for the purpose of conducting
ornithological research, treasure hunting and to enable Harris to research a
proposed book. Harris agreed to pay the premium on a policy of marine
insurance on the vessel, put the vessel in seaworthy condition, and pay Sherman
approximately $2,000 for the use of the vessel. This agreement was reduced to
writing in an instrument styled "Agreement for Loan and Use of Boat at Costs",
dated November 5, 1967.

On November 3, 1967, Sherman and Harris contacted Arthur Pendleton, vice

president of Coates & Dorsey, for the purpose of obtaining the necessary
insurance coverage. They advised Pendleton that Sherman was going to loan
the Penida to Harris for the voyage to the Galapagos Islands for the purpose of
conducting ornithological research; that Harris would pay for the insurance and
be responsible for putting the Penida into seaworthy condition both before and
after the voyage. Apparently, neither Sherman nor Harris informed Pendleton
of any written agreement between themselves, either executed or contemplated,
which would amount to a chartering of the vessel, nor that Harris was to pay
additional consideration to Sherman for the use of the vessel, nor that the
voyage had a commercial purpose.

At the trial, Pendleton testified that after discussing the matter with Sherman
and Harris he contacted the manager of Continental's Marine Department and
fully conveyed the information he had received from Sherman and Harris.
Coates & Dorsey was thereafter authorized by Continental to issue to Sherman
a policy of marine insurance on the hull of the vessel containing a private
pleasure warranty, that is, a restrictive clause prohibiting the chartering of the
vessel or its being used for commercial purposes.1 The policy was issued and
mailed to Sherman on November 17, 1967.

On January 22, 1968, the Penida was demasted and damaged to the extent of
$10,160 when it rammed a freighter off Key West, Florida, while in the course
of transferring a seriously ill seaman to the freighter.

Continental denied coverage and subsequently brought an action for rescission

of the marine insurance policy in question on the ground of fraud and
misrepresentation, alleging that Sherman had failed to advise it of the true and
intended purposes and uses of the vessel and the fact that the vessel was to be
used for commercial purposes as distinguished from private pleasure purposes
in violation of the private pleasure warranty. Sherman answered by alleging
that Continental's agent, Coates & Dorsey, was duly advised that Sherman was
chartering the vessel to Harris and that Harris paid a large portion of the

premiums and that Sherman was to receive other consideration and that,
notwithstanding this knowledge, Coates & Dorsey caused the insurance policy
to issue. Sherman also counterclaimed against Continental for recovery under
the policy and filed a third-party claim against Coates & Dorsey. In the thirdparty claim, Sherman alleged that Coates & Dorsey was advised that Harris
was paying for the insurance and would financially reimburse and/or enrich
Sherman for the use of the Penida and that Coates & Dorsey was negligent in
failing to give proper and adequate information to Continental as to the true
status of the arrangement between Sherman and Harris or in failing to secure
adequate insurance coverage in behalf of Sherman. In its answer to the thirdparty claim, Coates & Dorsey admitted that the premium had been paid by
Harris and that Harris was going to do certain repairs on the vessel. It further
alleged that Sherman was contributorily negligent in failing to fully advise
Continental of the intended uses and purposes of the vessel.
7

On July 31, 1969, an order was entered dismissing the rescission action upon
stipulation of Continental and Sherman, after they had entered into a covenant
not to sue.

Thereafter, Coates & Dorsey cross-claimed against Continental for

indemnification alleging that all facts communicated to Coates & Dorsey by
Sherman and Harris were in turn communicated by it to Continental so that
Continental had actual knowledge that Harris paid the insurance premium,
would put the vessel in a seaworthy condition at his own expense and that the
vessel would be used for ornithological research, and, having this knowledge,
Continental authorized it to deliver the policy to Sherman. Further, Coates &
Dorsey alleged that at all times it acted within the course and scope of its
employment with Continental, but that Continental's denial of coverage and suit
for rescission was an attempt to repudiate the authorized act of Coates &
Dorsey, its authorized agent, in issuing the policy and prompted Sherman's
third-party action against it.

On September 22, 1969, the district court entered an order granting

Continental's motion to dismiss Count I of Coates & Dorsey's cross-claim for
indemnification with prejudice for failure to state a claim upon which relief
could be granted under Rule 12(b) (6), Fed. R.Civ.P., 28 U.S.C.2 Coates &
Dorsey contends that this was error.

10

At the trial, Coates & Dorsey's cross-claim for indemnification, which had been
previously dismissed, was admitted into evidence over Coates & Dorsey's
objection and published to the jury by reading. Sherman's counsel was also
allowed to state during his closing argument to the jury that the dismissal of the

cross-claim was presently on appeal and indicated that Coates & Dorsey would
be successful in obtaining indemnification from Continental should Sherman
prevail in the action before the jury. Coates & Dorsey contends that the
admission of the cross-claim into evidence and the argument to the jury which
it supported constituted prejudicial error.
11

Coates & Dorsey also contends that the district court's refusal to admit
Continental's complaint in the original rescission action into evidence was
prejudicial error and that the district court erred in not granting Coates &
Dorsey's motion for a directed verdict and motion for judgment notwithstanding
the verdict and/or new trial.

12

I. Admission of the Cross-claim.

13

In its answer to the third-party complaint, Coates & Dorsey admitted "that part
of the insurance premium was paid with the check of Richard Harris, and that
Richard Harris was going to do or have done certain repairs upon the `Penida',"
and denied the allegations of Sherman's third-party complaint that it had been
advised that Harris "was going to otherwise financially reimburse and/or enrich
the owner of the vessel for the use of the same in a trip from Miami to the
Galapagos Islands and return". In its amended cross-claim against Continental,
Coates & Dorsey alleged:

14

2. That prior to the issuance of such policy, ROBERT SHERMAN informed

COATES & DORSEY, INC., of certain facts pertaining to the boat, its use, and
the consideration for its use, including the fact that the party using the boat
would pay for the insurance premium, would pay approximately $400.00 or
$500.00 to make the boat seaworthy, and that the boat would be used for
ornithological research; that all facts which were communicated to COATES &
DORSEY, INC., were in turn communicated by COATES & DORSEY, INC.,
to CONTINENTAL INSURANCE COMPANY OF NEW YORK; that
CONTINENTAL INSURANCE COMPANY OF NEW YORK, having actual
knowledge that the aforesaid consideration would be paid for the use of the
"Penida", did nevertheless authorize COATES & DORSEY, INC., to
countersign and deliver unto ROBERT SHERMAN its insurance policy which
is the subject matter of the original Complaint, the Counterclaim, and the Third
Party Claim filed in this cause. (Emphasis supplied.)

15

The amended cross-claim was introduced into evidence by Sherman over

Coates & Dorsey's objection, and Sherman's attorney relied heavily on the
inconsistency between the allegations of the third-party answer and the cross-

claim in closing argument, arguing that the allegations of the cross-claim

constituted an admission of liability on the part of Coates & Dorsey and
strongly intimating that although the cross-claim against Continental had been
dismissed, Coates & Dorsey would ultimately prevail, so that if the jury
returned a verdict against Coates & Dorsey the cost of the judgment would be
passed on to Continental.
16

As a general rule the pleading of a party made in another action, as well as

pleadings in the same action which have been superseded by amendment,
withdrawn or dismissed, are admissible as admissions of the pleading party to
the facts alleged therein, assuming of course that the usual tests of relevancy are
met. Raulie v. United States, 10 Cir., 1968, 400 F.2d 487; Ross v. Philip Morris
& Company, 8 Cir., 1964, 328 F. 2d 3; Great American Indemnity Company v.
Rose, 5 Cir., 1957, 242 F.2d 269; Borel v. United States Casualty Company, 5
Cir., 1956, 233 F.2d 385; Fuller v. King, 6 Cir., 1954, 204 F.2d 586. See Rule
8-04(b) (4), Proposed Federal Rules of Evidence (1969). Strictly applied,
however, this rule would place a litigant at his peril in exercising the liberal
pleading and joinder provisions of the Federal Rules of Procedure in that
inconsistent pleadings under Rule 8(e) (2) could be used, in the proper
circumstances, as admissions negating each other3 and the allegations in thirdparty complaints and cross-claims seeking recovery over in the event of
liability in the principal action could be used in that action as admissions
establishing liability. Thus, as a necessary exception to the general rule, there is
ample authority that one of two inconsistent pleas cannot be used as evidence in
the trial of the other. Giannone v. United States Steel Corporation, supra, 238
F.2d at 544, n. 4; McCormick on Evidence, 242, pp. 509-510 (1954); Note, 17
Tex. Law Rev. 191 (1939). It would seem that this principle would also include
inconsistent positions taken in pleadings in a complicated joinder situation,
involving, as here, the contingent liability of third parties. See Hines v. Trager
Construction Co., Fla.Dist.Ct.App., 1966, 188 So.2d 826, 829, cert. den. Fla.,
194 So.2d 618.

17

The cross-claim at issue here asserts a claim, in the nature of a third-party

claim, seeking recovery over against Continental by way of indemnity in the
event Coates & Dorsey fails to prevail in the negligence action. Accordingly,
the pleading assumed the truth of Sherman's allegations against Coates &
Dorsey as a necessary predicate in establishing Continental's duty to indemnify.
Coates & Dorsey was thus required, at least implicitly, to take a position
inconsistent with its position in the negligence action. To allow the jury to
make adverse inferences from this would defeat much of the salutary effect of
the flexible joinder provisions of the federal rules. Accordingly, we hold that it
was prejudicial error, necessitating a new trial, to admit as an admission Coates

& Dorsey's cross-claim against Continental. This error was further compounded
when counsel was allowed to suggest to the jury that the appeal from the crossclaim would be successful and that Continental would ultimately bear the cost
of any resulting judgment. See McCormick on Evidence, 152, p. 319 (1954);
Rule 4-03, Proposed Federal Rules of Evidence and the Advisory Committee's
Note thereunder.
18

II. Dismissal of Cross-Claim for Indemnification.

19

As a general rule, a principal is obligated to indemnify an agent for any

"payments of damages to third persons which he is required to make on account
of the authorized performance of an act which constituted a tort * * *," but is
not required to indemnify an agent "for pecuniary loss * * * resulting solely
from the agents negligence". Sections 439(c) and 440(a), Restatement (Second)
of the Law of Agency (1958).4

20

In his third-party complaint against Coates & Dorsey, Sherman alleged that
Coates & Dorsey "was negligent in that it failed to give proper and adequate
information to the Plaintiff herein [Continental] as to the true status of the
arrangement between the owner [Sherman] and Richard Harris, and/or, it failed
to secure adequate coverage in behalf of Third Party Plaintiff [Sherman] and he
has been deprived of the protection which an adequate policy would have
provided him, all to his harm and detriment." Sherman thus makes two
different allegations: (1) that Coates and Dorsey failed to inform Continental of
the arrangement between Sherman and Harris; or (2) that, even if it conveyed
this information to Continental, it failed to secure adequate insurance coverage.
In this posture, the jury might find Coates & Dorsey liable on the ground either
that the issuance of the inadequate policy was solely the result of Coates &
Dorsey's failure to fully inform Continental of the arrangement existing
between Sherman and Harris, or that, even though Coates & Dorsey fully
informed Continental, a policy providing inadequate coverage was issued as a
result of negligence for which Coates & Dorsey, as an agent for Continental,
was liable. In the former situation, the principles of law expressed in the
preceding paragraph clearly indicate that Coates & Dorsey would not be
entitled to indemnification from Continental because the loss would be solely
caused by Coates & Dorsey's negligence. In the latter situation, however, the
reverse would be true, in that the loss would be the result of the issuance of the
policy by Coates & Dorsey with Continental's authorization, in the face of
information known to both that would lead a prudent man to the conclusion that
the coverage so issued was inadequate. In light of this, the district court's
dismissal of Count I of the cross-claim against Continental must be reversed
and the question of indemnity submitted to the jury along with Sherman's third-

party claim against Coates & Dorsey.

21

III. Admission of Continental's Original Complaint.

22

In light of the fact that Continental is now again in the case as a party defendant
in Coates & Dorsey's action for indemnification, its original complaint against
Sherman for rescission of the policy is admissible as an admission of a party
insofar as it is relevant to the indemnity action and is subject to the general
limitations concerning the use of dismissed pleadings as admissions discussed
in Part I of this opinion.

23

IV. Denial of the Judgment Notwithstanding the Verdict.

24

It is well established that a judgment notwithstanding the verdict should not be

granted unless under the evidence, together with all inferences that can be
reasonably drawn therefrom, there can be but one reasonable conclusion as to
the proper judgment. O'Neil v. W. R. Grace & Co., 5 Cir., 1969, 410 F.2d 908;
Leach v. Millers Life Ins. Co. of Tex., 5 Cir., 1968, 400 F.2d 179. Viewed by
this standard, and particularly in view of the credibility issues inherent in a case
of this nature, we cannot say that the district court erred in denying the motion
for a judgment notwithstanding the verdict.

25

The judgment of the district court on the jury verdict in favor of the appellee
Sherman is hereby reversed and the matter is remanded for a new trial. The
final judgment dismissing the cross-claim for indemnification against
Continental is, likewise, reversed.

26

Reversed and remanded.

27 PETITION FOR REHEARING AND PETITION FOR REHEARING EN

ON
BANC

Notes:
*

On October 26, 1970, Stanley Haves, Administrator of the Estate of Robert

Sherman, deceased, was substituted as a party to this action, pursuant to Rule
43(a) F.R.A.P. 28 U.S.C.A

The private pleasure warranty contained in the policy reads as follows:

The coverage under this policy shall terminate upon the sale, assignment,
transfer or pledge on the interest insured hereby or upon the chartering, hiring
or use of the vessel for other than private pleasure purposes unless the previous
written consent of this Company has been obtained.
2

Count II dealt with the indemnification of attorneys' fees if Coates & Dorsey
was successful in the negligence action and is not at issue here

In Giannone v. United States Steel Corporation, 3 Cir., 1956, 238 F.2d 544,
547-548, the court noted:
* * * Authorities rarely articulate what we believe to be a conflict between the
admissions through pleading rule and Rule 8(e) (2) of the Federal Rules of
Civil Procedure, 28 U.S.C., which allows inconsistent, alternative and
hypothetical pleading. The rules encourage parties to plead not only what they
know is factually true, but also any fact if they believe "there is good ground to
support it." See Fed.R.Civ.P. 11. This soundly based policy * * * would tend to
be defeated if allegations in the pleadings are admissible as evidence. Parties
will hesitate to make notice-giving allegations at the risk of their being used as
evidence, especially considering Fed.R.Civ.P. 15 liberating amendments.

The Comment to 439 states:

d. An agent who violates his duty to give information to the principal, as a
result of which an unnecessary payment is made, or who is guilty of negligence
in the performance of his duties to the principal, is not entitled to indemnity for
losses caused by such conduct.
*****
g. * * * If, however, the agent, at the direction of the principal, commits an act
which constitutes a tort but which the agent believes not to be tortious, he is
entitled to indemnity to the amount which he is required to pay as damages.
*****
The Comment to 440 states:
b. * * * The principal has no duty to indemnify the agent for loss caused solely
by the agent's negligence whether or not the negligence constitutes a breach of
duty to the principal. * * *

28

Before RIVES, AINSWORTH and MORGAN, Circuit Judges.

PER CURIAM:

29

The Petition for Rehearing is DENIED and no member of this panel nor Judge
in regular active service on the Court having requested that the Court be polled
on rehearing en banc, (Rule 35 Federal Rules of Appellate Procedure; Local
Fifth Circuit Rule 12) the Petition for Rehearing En Banc is denied.